A Quantitative Model of Banking Industry Dynamics

Dean Corbae and Pablo D'Erasmo

No 26-45, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We develop a simple model of banking industry dynamics to study the relation between market structure and financial stability. Motivated by data, we analyze an environment where a small number of dominant (nonatomistic) banks strategically interact with a large number of small (atomistic) banks. A nontrivial endogenous bank size distribution arises out of entry and exit in response to aggregate and regional shocks to borrowers’ production technologies and banks’ idiosyncratic deposit inflows. Since the model has nonatomistic banks that generate granular spillovers from idiosyncratic shocks and pose systemic risk, we use the model to study the implications of too-big-to-fail policies.

Keywords: Macroprudential policy; bank size distribution; industry dynamics with imperfect competition (search for similar items in EconPapers)
JEL-codes: E44 G21 L11 (search for similar items in EconPapers)
Pages: 69
Date: 2026-10-01
New Economics Papers: this item is included in nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2026/wp26-45.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:103867

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2026.45

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().